A turbulent earnings season for the airline industry became even bumpier this morning after American Airlines (AAL, Financial) slashed its FY24 EPS guidance to $0.70-$1.30 from $2.25-$3.25. The beleaguered carrier is contending with a mix of macroeconomic, industry-wide, and company-specific headwinds. Like competitors such as Delta Air Lines (DAL, Financial), which issued downside Q3 EPS guidance on July 11, AAL is feeling the effects of a supply and demand imbalance following years of capacity increases across the industry. However, AAL's own sales strategy has compounded the problem, leading to even steeper declines in its margins and profits.
- Rather than focusing on more profitable parts of the business, including premium products and international fares, AAL has prioritized passenger load. In its efforts to fill seats, the company has offered discounted prices, as illustrated by the 6.3% decrease in yield and 5.6% drop in TRASM.
- AAL has reduced its sales force while relying more on existing corporate contracts to drive sales. Although this plan helped to keep a tight lid on costs -- CASM-ex dipped by 0.1% in Q2 -- it has also had a profound negative impact on the top-line and margins.
- For Q2, revenue increased by a pedestrian 2% year-over-year (compared to 5.4% for DAL and 5.7% for United Airlines (UAL, Financial)), non-GAAP operating margin dove by 570 basis points year-over-year to 9.7%, leading to a 43% plunge in EPS to $1.09. The business climate isn't looking any better for Q3, either, with AAL predicting a breakeven quarter -- well below what analysts were expecting.
- With shares already down by about 25% since AAL cut its Q2 guidance on May 28, much of this bad news was already priced into the stock. Therefore, participants are looking further out on the horizon. CEO Robert Isom stated that AAL is reversing its failed sales and distribution strategy while also echoing UAL CEO Scott Kirby's recent commentary that the industry-wide overcapacity issues will soon be corrected.
Overall, it was another rough quarter for AAL and Q3 is shaping up to be even worse, but investors are setting their sights on clearer skies in late 2024 and beyond.
